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IMF says UK growth is too low, and the recovery is too slow

The International Monetary Fund has praised the Government for the progress being made towards tackling the budget deficit, but said it needs to do more to promote growth.

In a report on the UK, the IMF chief Christine Lagarde said unemployment is "much too high" and the economy remains "flat".

Ms Lagarde said the recovery is expected to gain pace in the second half of 2012, but that it "had not taken hold" so far.

She called for further monetary stimulus and for the Government to use a wider variety of "tools" to stimulate growth, through public spending. Suggestions included:

A further round of "quantitative easing"

A reduction in base interest rates

A temporary VAT cut

Lowering the rate of National Insurance

The Chancellor George Osborne welcomed the report:

The IMF couldn't be clearer today.

Britain has to deal with its debts and the Government's fiscal policy is the appropriate one and an essential part of our road to recovery.

The report made clear that the British recovery depended largely on the events in the eurozone, whose prospects look increasingly bleak according to another international body, the Organisation for Economic Co-operation and Development (OECD). They offered a stark warning:

Today we see the situation in the euro area close to the possible downside scenario which if materialising could lead to a severe recession in the euro area and with spillovers in the rest of the world

– OECD chief economist Pier Carlo Padoan

The OECD cut the economic growth forecast in the eurozone to -0.1%, rising to 0.9% in 2013 should the path of "fiscal consolidation", or austerity measures, continue to be followed.

The IMF said the crisis in the eurozone continues to threaten the meagre recovery the UK has made.

Setbacks in the euro area are the key risk to economic prospects and financial stability in the UK, as trade and financial links are substantial

– IMF Chief Christine Lagarde

The OECD predicted the UK economy would grow by 0.5% in 2012, and by 1.9% in 2013.

The IMF and the OECD agreed on the importance of eurozone members to reduce their structural deficit over the medium term and the IMF stressed that the UK efforts to do so "remains essential".

The IMF also welcomed the "bold monetary stimulus" offered so far by the Bank of England, but stressed the need for more measures to help reduce the cost of private sector lending.

Ms Lagarde also said banks should should focus on strengthening their balance sheets by building capital reserves rather than selling off assets and suggested this should be achieved by raising external capital and limiting bonuses.

I cannot stress enough the importance of robust regulation and supervision for global financial hubs such as the UK.